Bank fraud and willful defaulter declarations quashed for violating natural justice principles in proceedings

The Bombay HC quashed willful defaulter and fraud declarations against two companies. The court found that fraud declarations were issued without notice or hearing opportunities, violating natural justice principles. While show cause notices were issued for willful defaulter proceedings, the bank failed to provide supporting material to petitioners, preventing them from defending themselves adequately. The court held that both declarations breached natural justice principles and were arbitrary, warranting their quashing. The petitions were allowed in part.

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Issues Involved:
1. Fraud Declaration
2. Willful Defaulter Orders

Summary:

Fraud Declaration:
The petitions challenge the respondent's declaration of petitioner no. 1's loan account as fraud vide declaration dated 4th April 2020. The petitioners argue that the fraud declaration was issued without issuing any notice to them and without giving an opportunity of hearing, thus breaching the principles of natural justice. The respondents relied on the RBI's Master Directions on Fraud for the declaration but failed to demonstrate compliance with the issuance of a show cause notice or an opportunity of being heard. The court noted that the fraud declaration was issued without giving an opportunity of hearing to the petitioners, and no document indicated that any show cause notice was served upon the petitioners. The legal principles laid down by the Hon'ble Supreme Court in the case of SBI and others Vs. Rajesh Agarwal mandate compliance with the basic principles of natural justice, namely issuance of show cause notice and an opportunity to be heard before declaring the account as fraud.

Willful Defaulter Orders:
The orders dated 18th February 2021 and 7th October 2021 declared the petitioners as willful defaulters. The petitioners contended that the show cause notice did not reveal the fraud declaration or any basis for issuing the notice, thus depriving them of making an appropriate representation. The court observed that the show cause notice did not disclose any material or record based on which the allegations were made. The reasons recorded by the Willful Defaulter Identification Committee (WDIC) and the review committee did not form part of the allegations in the show cause notice. The court held that the orders declaring the petitioners as willful defaulters suffer from a breach of principles of natural justice and are thus arbitrary.

Court's Order:
1. The fraud declarations dated 4th April 2020, declaring the account of Immense Packaging Private Limited and Govinda Industries Private Limited are quashed and set aside.
2. Orders dated 18th February 2021 and 7th October 2021 declaring the petitioners as willful defaulters are quashed and set aside.
3. Respondent bank shall supply all the necessary material based on which the show cause notices were issued to the petitioners within six weeks.
4. Petitioners to submit a fresh reply to the show cause notices within six weeks after the necessary material is supplied.
5. After giving a personal hearing to the petitioners, the WDIC shall pass fresh orders on the show cause notices. If adverse, petitioners can file representation before the review committee.
6. The bank may initiate fresh proceedings for declaration of the company's account as fraud by issuing a show cause notice, following due procedure prescribed in RBI's Master Directions on Fraud.
7. All rival contentions on merits with respect to the show cause notices for willful default and fresh proceedings, if any, are kept open.
8. For taking a fresh decision on the show cause notice applying the RBI's wilful defaulter's Master Circular, the bank shall follow the guidelines under the RBI's Master Circular and the principles settled in Milind Patel's case.
9. In regard to proceedings for declaring the company's account as fraud, if initiated by the bank, due procedure under the RBI's Master Directions on Fraud and the principles of law as declared by the Hon'ble Supreme Court in the case of SBI and others Vs. Rajesh Agarwal shall be followed.
10. Rule is made absolute in the above terms with no order as to costs.

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